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10 benefits of federal student loans

Why you might want to go with government funding first.

Updated

Federal student loans tend to be the better choice than private loans for most students. In fact, most private lenders advertise themselves as supplements to federal aid and even recommend students fill out the FAFSA first. Because these loans are controlled by the government, they can offer more flexibility when it comes to borrowing and making repayments.

1. Competitive rates and fees

Everyone who applies for a federal student loan gets the same rates and fees, which Congress sets each year based on the lending market. For the 2019–2020 academic year, those who apply for a federal Direct Loan gets a rate of 4.54% to 7.08%.

While rates on private loans often start lower, you likely won’t get a better deal unless you or your cosigner have stellar credit and a high income.

2. You can apply without a cosigner

Federal loans are among the only student loan options that don’t have credit or income requirements. This means you can apply and get approved without bringing on a cosigner. In fact, they’re designed so that students of all income types can have access to funding, regardless of their family’s finances.

3. More flexible repayment plans

A major benefit of federal loans are the repayment plans — and it’s a top reason not to refinance with a private company. Most private lenders offer only full standard repayments of principal and interest after you’ve graduated, which can be difficult to afford when you’re just starting out in your career. While you can choose a standard repayment plan for your federal loans, you have two other options as well.

Income-driven repayment plans

Federal loans come with multiple repayment plans based on your income. Rather than paying a fixed amount for the entirety of your loan, your monthly repayments are based on how much you make — typically reflecting 10% to 20% of your income. The government forgives whatever is left of your loan once the term is up‚ usually after 20 or 25 years.

Graduated repayment plans

Recent graduates who expect their income to rise as they build their career can choose a plan that starts with low monthly repayments that increase every two years. This option involves less paperwork than income-driven repayment plans, but the government won’t forgive part of your loan.

4. More options to pause payments

Federal loans also come with more options for deferment and forbearance. Most private lenders allow you to pause repayments for a few months if you face economic hardship or are called to active military duty.

But with federal loans, you can apply for deferment or forbearance in a variety of situations, including going back to school, starting a medical residency or joining the Peace Corps.

5. Spend less time comparing options

Federal loans are a one-size-fits-all product — there’s nothing to compare. Private lenders, on the other hand, have different rates, terms and repayment options. Most also require different eligibility, with some dictating even the type of school you can attend.

6. Avoid interest capitalization on subsidized loans.

Repayments typically don’t start on federal and private student loans until six months after you finish school or drop below half-time enrollment. However, interest starts adding up as soon as your school receives the money. Typically, the interest that accrues during the time between getting the loan and making repayments is added to your loan balance — called interest capitalization. This means you’re effectively paying interest on interest.

This isn’t the case with federal Direct Subsidized Loans, which are available to undergraduate students. Instead, the government pays for the interest that adds up while you’re in school and during your grace period.

7. It takes longer to default or become delinquent.

You must be 270 days late on your repayments before the federal government considers your loan in default. And you aren’t considered delinquent until you’ve missed a repayment by 90 days.

In contrast, most private lenders consider your loan delinquent around 15 days after missing a repayment. Default typically kicks in between 60 and 90 days after the first missed repayment.

8. More forgiveness programs

Going into a low-paying public service or teaching job? Federal borrowers have more options for loan forgiveness than private student loan holders.

This includes the popular Public Service Loan Forgiveness (PSLF) program, which forgives your entire student debt load after making 120 income-driven repayments while working an eligible public service job. It also includes the Teacher Loan Forgiveness program, which offers partial forgiveness after five years of working at a low-income school.

9. Multiple ways to cancel and discharge your loan

Federal loans come with more protections for when life takes an unexpected turn that keeps you from making repayments. You can have your student debt canceled in a wide range of circumstances, from when your school unexpectedly closes to declaring bankruptcy. Most private lenders discharge a loan in the event of your death, but few other circumstances qualify.

10. Consolidate without a credit check

You can combine your federal loans into a federal Direct Consolidation Loan without a credit check. Not so with a private lender, which often require a credit check to refinance.

While you won’t get a notably different interest rate with a Direct Consolidation Loan, it opens up more repayment and forgiveness programs. It also allows you to switch your servicer if you’re unhappy with the company handling your repayments.

Are there any drawbacks to federal loans?

Yes. Weigh the many benefits of federal loans against potential drawbacks like:

  • Borrowing limits. There’s a chance federal loans won’t cover all of your financial aid needs — especially if you’re in a graduate or professional program. In those cases, you might max out your limit and have to borrow from a private lender.
  • Ineligibility for DACA and international students. Only select noncitizens are considered eligible for federal student aid — and DACA recipients aren’t included. You also won’t qualify with a student visa.
  • Bad grades disqualify you. Drop below a 2.0 GPA at most schools, and you could lose your eligibility for federal aid.
  • School restrictions. You must attend a degree-granting school that participates in Title IV to qualify for these funds. If you need help paying for a training program like a coding bootcamp, a private lender might be your only choice.

Bottom line

The benefits of federal student loans outweigh the drawbacks in most circumstances. Federal loans offer competitive rates to more borrowers and come with more flexible repayment options than you’ll find with private lenders.

Learn how financing your education works in our guide to student loans.

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